The Credit Card Gravy Train Is Running You Down

Posted on Feb 14, 2014

[W]hen anyone brings up Tobin taxes (small charges on every [financial] trade) as a way to pay for the bailout and discourage speculation, the financial services industry becomes utterly apoplectic. . . . Yet here in our very midst, we have a Tobin tax equivalent on a very high proportion of retail trade. . . . [Y]ou can think of the rapacious Visa and Mastercharge charges for debit transactions . . . as having two components: the fee they’d be able to charge if they faced some competition, and the premium they extract by controlling the market and refusing to compete on price. In terms of its effect on commerce, this premium is worse than a Tobin tax.

A Tobin tax is intended to have the positive effect of dampening speculation. A private tax on retail sales has the negative effect of dampening consumer trade. It is a self-destruct mechanism that consumes capital and credit at every turn of the credit cycle.

The lucrative credit card business is a major factor in the increasing “financialization” of the economy. Companies like General Electric are largely abandoning product innovation and becoming credit card companies, because that’s where the money is. Financialization is killing the economy, productivity, innovation, and consumer demand.

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Busting the Monopoly

Exorbitant merchant fees are made possible because the market is monopolized by a tiny number of credit card companies, and entry into the market is difficult. To participate, you need to be part of a network, and the network requires that all participating banks charge a pre-set fee.

The rules vary, however, by country. An option available in some countries is to provide cheaper credit card services through publicly-owned banks. In Costa Rica, 80% of deposits are held in four publicly-owned banks; and all offer Visa/MC debit cards and will take Visa/MC credit cards. Businesses that choose to affiliate with the two largest public banks pay no transaction fees for that bank’s cards, and for the cards of other banks they pay only a tiny fee, sufficient to cover the bank’s costs.

That works in Costa Rica; but in the US, Visa/MC fees are pre-set, and public banks would have to charge that fee to participate in the system. There is another way, however, that they could recapture the merchant fees and use them for the benefit of the people: by returning them in the form of lower taxes or increased public services.

Local governments pay hefty fees for credit card use themselves. According to the treasurer’s office, the City and County of San Francisco pay $4 million annually just for bank fees, and more than half this sum goes to merchant fees. If the government could recapture these charges through its own bank, it could use the proceeds to expand public services without raising taxes.

If we allowed government to actually make some money, it could be self-funding without taxing the citizens. When an alternative public system is in place, the private mega-bank dinosaurs will no longer be “too big to fail.” They can be allowed to fade into extinction, in a natural process of evolution toward a more efficient and sustainable system of exchange.

Ellen Brown is an attorney, chairman of the Public Banking Institute, and author of twelve books including the bestselling Web of Debt. In her latest book, The Public Bank Solution, she explores successful public banking models historically and globally. She is currently running for California State Treasurer on a state bank platform.